Let's Change The Law So That Work Does Not Get Taxed Much

If you go back 40 years and follow the progression of taxes, rates, brackets, loopholes, dodges, etc., it becomes readily apparent that people don't like to pay taxes and will do just about anything to avoid them. It also is true that the middle and lower classes (i.e. the famous 50%) pay very little income taxes. Back in the 1950s and 1960s, everyone paid around a 20% effective tax rate regardless of what bracket they were in.

Jealousy and greed kicked in when Congress decided to make the wealthy pay more for wages over $1 Million. Corporations pushed back by capping wages at $1 Million and providing deferred compensation to make up the difference. Thus began the fulfillment of the law of unintended consequences to where today we have CEOs and other corporate leaders making hundreds of millions of dollars, and the same group of people is still jealous.
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I personally think that everyone should pay some taxes so that they have at least a little skin in the game of funding our country. And, yes, it is true that all workers pay FICA and Medicare, but those can be construed as retirement and insurance contributions. So, let's just stipulate that the 50% will pay either nothing or a token amount of taxes.

My proposal is that we lower and flatten taxes on wages, and increase taxes on unearned income. (Note, since there will never be solely a flat sales tax, this is the next best thing.)

The sticking point is what constitutes 'work' and how high the amount of wages can go. My first thought is that if it is on a W2, then it gets taxed at the same rate across the board... let's say 15%. And like the Fair Tax, those that make under a certain amount of money would get a sliding scale of a monthly credit or payment to shore up their income and provide a bit of progressivity to the tax structure.

What if Mr. Bigwig, or Ms. Movie Star makes 30, 40, even 100 million dollars in W2 wages? Tax it at 15%. So what? Here's the deal, people with money either spend it, invest it or put it in a bank where someone else invests it. If they spend it, they will get hit with various taxes on the sale and in many cases on the use of the product. If they invest it or put it in a bank, they will get dividends or increases in value which usually get taxed. Make this tax 20% or 25%.

Face it, this investment income or unearned income is gravy. Liberals like to say that we should pay for the great financial infrastructure we have in this country. Well, here is their opportunity. What about all of the crazy arbitrage and nutty schemes they do on Wall Street? Tax the profits. Put a transaction tax on it, just like driving down a toll road. If you want to play, you have to pay.

Let's tax financial finagling, but leave worker's wages alone. Let companies decide how to compensate their high earners. Full W2, less tax. Lower W2 with deferred compensation? Tax the increase in value and the deferred comp as a capital gain when it is cashed in. If people want to play games with wages, benefits and other compensation, great. Pay lower taxes on W2 and higher taxes on the various 1099s (except for payment for services rendered.)

It is high time to start respecting workers, no matter how much they make. Fix it so that people aren't afraid to make more money because they will have to start giving more to the government. If people invest well, they pay more than those that do not.

There are a lot of very, very rich people that make their money by just buying and selling financial instruments. This provides no real value to the GDP. It just churns out money and increases leverage. Do the people that do this work hard? Maybe some do. But it is of little or no benefit to society. It is Monopoly money, except that it is real and when it crashes down, we get what we had in 2008 or back in the late 90s with the Long-Term Capital Management fiasco.

Is this plan too simple? Probably, but we have to start somewhere and by respecting work, most of us become workers again and may actually end up fighting for the same cause.

Comments

Craig Hollins said…
I would argue that, rather than your plan being too simple, it is too complex. If you want to encourage earning but tax people according to their wealth then make earning tax free but put all the spending in a all encompassing consumption tax.

Imagine a federal levied sales tax of, say, 30%. It applies to everything from home rents, lawn mowing services, goods bought - everything. You will be taxing only consumption (something that I think everyone agrees the US does too much of) and earning is tax free.

Now the states will have to get rid of their sales tax or you'll end up with a tax on a tax. Maybe the states can have 1/3 of the revenue collected within their borders. This will encourage them to promote tourism (a very high employer industry) and other industries of trade, knowing they will get, effectively, 10% of the lot.

You can't avoid it with write offs. You pay the flat rate from dollar one. Rich people spend more so pay more. Thrifty people are the only tax evaders.

In Australia we call this a Goods and Services Tax or GST. It's currently at 10% but there is talk of moving to the model highlighted above.

What about goods that are bought and sold? Well, I buy something for $100 and sell it for $200. I pay $10 GST when I buy it and collect $20 when I sell it. I give the government the difference quarterly, ie $10.

Ironically, the bigger the tax, the easier it is to catch the crooks. Imagine a 30% GST. You get a quote from two plumbers for work you know will cost about $1,000 but one is quoting $700. Guess who is going to ask for cash and offer no receipt?

Now think of the savings. Income tax returns are no longer filed. IRS only does GST audits. State sales tax (which is confusing) is eliminated but you use the same infrastructure to collect GST. If you're smart you'll use it to remove a lot of other inefficient taxes as well such as hotel bed taxes, airport taxes etc.

Simple to understand, efficient and simple to implement and hard to avoid.
The Asterisk said…
@Craig, oddly enough, this is something that you and I can agree on. However, the above approach is something that is loosely akin to our current system. Your idea is 'radical', but only in the sense that it is very different from how things are currently done.

Neal Boortz and others have pushed the "Fair Tax" as a consumption tax which removes all corporate and individual taxes. While very popular with individuals who hear about it and understand how it works, it gets no traction in Washington. Part of the Fair Tax plan is that people under a certain amount of income get a pre-bate which gives them money back to pay their share of the tax.

The reason (I believe) that there is no political will to radically change our tax code is that it removes the largest chunk of their power, and that is the power to carve out set-asides and reduced taxes for donors and powerful constituents. Probably the only way that we could get something like this through to be law would be to hold a Constitutional Convention and have the states ram through a Constitutional amendment.

Lastly, if we had a government fully funded by a percentage consumption tax and that tax was required to be set within a few percent of our annual budget, I believe that the willingness to increase spending would be severely restricted and self-regulating.

Alas, we will probably never find out, since there is no political will to fix the mess we are in.

Craig Hollins said…
You talk of political will in a defeatist manner which is strange for someone living in a country that is so proud of democracy. Don't give the poor rebates - give them pay increases instead. It's going to mean more tax immediately because the poor spend nearly every cent they earn.
Hell, I'd even go as far as saying add a dollar to the price of a gallon of gas and get rid of car registration fees and road tolls. Efficient to collect, hard to avoid and user pays. If you want to evade tax, buy a push bike.

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